Question

Three years ago you made a error on your federal tax return by underpaying your taxes in the amount of $4,000. The IRS charges interest and penalty of 6% per year and hae found your error. Originally you owed $4,000. Now how much do you owe the IRS?

N= I/Y= PV= PMT= FV= P/Y=

Answer 1

$4,764.064

Explanation:

As provided:

Error amount not paid = $4,000

Interest penalty charged by IRS per year = 6%

The error was made 3 years ago, that means the penalty will be attracted for 3 years.

Note: The interest charged by tax departments are compound interest but not simple interest.

Therefore, total amount due at end of 3 years =
`Principal * ( 1 + rate\ of\ interest)^D^u^r^a^t^i^o^n`

=
`4,000\ * \ (1 + 0.06)^3`

= $4,000
`*` 1.191016

= $4,764.064